In a Cutthroat Ocean Shipping Market, China Sharpens Its Knives

December 17, 2015, 4:14 PM UTC
World's Largest Container Ship The CSCL Globe Docks At Felixstowe Port
Freight containers sit on the deck of the world's largest container ship, the CSCL Globe, operated by China Shipping Container Lines Co., as it prepares to dock at the Port of Felixstowe, a subsidiary of Hutchison Whampoa Ltd., in Felixstowe, U.K., on Wednesday, Jan. 7, 2015. The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus. Photographer: Simon Dawson/Bloomberg via Getty Images
Photograph by Simon Dawson — Bloomberg/Getty Images

Ryan Petersen, as CEO of the freight forwarder Flexport, sees a constant flow of shipping prices every day. But two weeks ago, he heard a number that stopped him short:


That’s a spot rate offered by an unnamed Chinese carrier to ship 20-foot containers from Shenzhen to Rotterdam. That may seem low to the layman, and Petersen can confirm:

“It’s mind-blowingly cheap.”

Cheaper than a fancy dinner. Cheaper than a new phone.

“It’s probably the lowest shipping has been in the history of planet Earth.”

Though the trough has since ticked back up slightly, the ocean freight market as a whole is still at a historic low, thanks in part to aggressive moves by Chinese shipping companies. In fact, rates are so far beyond cheap that the best bargains are almost certainly below shippers’ fuel and manpower costs.

“Traditionally Maersk has always been the low cost provider,” says Petersen. “They have the most scale and they have the luxury of setting the prices. Now all of a sudden we’re seeing the Chinese come in at a lower price than Maersk. So if they’re going below Maersk’s marginal cost, for sure they’re going below their own marginal cost.”

The aggressive moves come as China’s COSCO and CSCL shippers are merging, set to become the world’s fourth largest container operator.

They also come with a dose of irony. Maersk and the other biggest shippers have been pushing prices down aggressively for years, says Petersen, to weaken smaller, less efficient competitors. Post-consolidation, the big boys theoretically would be able to raise rates.

But to have the Chinese undercut them now could threaten the big shippers’ strategy—especially because the merged Chinese megashipper, like its predecessors, will be state-owned. Loss-inducing or zero-profit rates could be sustainable for them, if the Chinese government decides it’s a worthwhile investment to goose Chinese exports. Even a behemoth like Maersk could end up humbled.

“You’re not bigger than the Chinese government,” says Petersen. “You can’t go deeper than them.”

Maersk in particular is already on its back heel, because of both falling global demand, and self-reinforcing industry trends towards overcapacity. But the real headaches are going to be for smaller shippers, who have less price flexibility. Other big losers in the crunch could be air freight services, as industry tracker Drewry says the gap between air and ocean rates hit record levels this year.

This could all change quickly, of course—especially because the lowest rates on the market are one-time spot deals, not long-term contracts.

“Nobody wants to sign contracts right now, from the carrier side,” says Petersen. “They don’t want to commit to prices this low for the long term.”

For more on shipping industry strategy, watch this Fortune video:


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